Inflation too low?
The Bank of Jamaica (BOJ) will have to sit with the International Monetary Fund (IMF) to discuss corrective measures in achieving monetary policy targets after the country fell below the IMF SBA programme inflation target of 3.5 per cent – 6.5 per cent.
Latest report from the Economic Programme Oversight Committee (EPOC) has shown that while the country’s fiscal and international reserves targets remain on track, inflation fell to 3.1 per cent as at May 2018 and further declined to 2.8 per cent as at June 2018.
The deepening out-of-target performance, which also falls below the BOJ’s target of 4.0 per cent to 6.0 per cent, has triggered the Monetary Policy Consultation Clause (MPCC) which requires the BOJ to consult with the IMF’s Executive Board on reasons for the deviation and the proposed policy response.
The Central Bank is also expected to provide the IMF with the anticipated inflation rate for the country going forward.
In a press release on Friday, economic programme Oversight Committee (EPOC) noted that the BOJ blamed stronger-than-anticipated recovery in agricultural supplies in the March 2018 quarter, as well as lower-than- forecasted imported inflation associated with a strengthening currency for the fall in inflation rate.
“A reduction of the pass through of oil prices to inflation and weak domestic demand conditions also influenced the low inflation outturn,” the bank said.
EPOC is co-chaired by Keith Duncan, Group CEO of JMMB, and Brian Wynter, governor of the Bank of Jamaica.
In November 2016, the Government entered a stand-by arrangement with the IMF which saw the country moving away from the targeting of Net Domestic Asset and Net International Reserves — to maintaining exchange rate flexibility, as well as to build up reserves via market-based purchases of foreign exchange.
The 36-month agreement is expected to further support the strengthening of the country’s monetary framework, while serving as an option for Jamaica to have the capacity to adjust policy settings in a flexible way to achieve its monetary policy objectives through increased focus on inflation targeting.
Globally, economists believe that a higher inflation rate is costlier, in economic terms, than a lower one as businesses are forced to raise their prices and banks raise interest rates in order to maintain a profit margin. Higher rates mean that marginal businesses will fail, thus increasing unemployment and harming the overall economy.
But low inflation is not without its risks, economists say. It could raise the risk of countries falling into deflation, in which wages and the prices of consumer goods and services decline on average. Deflation is associated with weak economic conditions.
On June 28, 2018 the BOJ aggressively lowered its policy rates by 50 basis points to 2.00 per cent in response to projections that inflation will remain below its targeted 4-6 per cent up to end December 2018.
The BOJ has indicated that the decision to loosen the policy stance is aimed at fostering greater credit expansion, stimulating aggregate demand and increasing the growth rate of GDP, which will support inflation returning to the target of 4.0 per cent to 6.0 per cent.
“EPOC continues to support the decision to lower policy rates and believes over the medium term it should stimulate credit expansion and economic growth,” the release said.
EPOC added that the country’s monetary quantitative performance continued to show mixed results at end June 2018, which is the date for which the IMF will complete the next review of the programme targets.
EPOC said that while inflation target has dropped, the GOJ continued its trend in solid fiscal performance over the review period meeting all its fiscal quantitative and indicative performance criteria as at end May 2018.
Tax revenue continues to be robust at $78.7 billion just ahead of the budget target of $77.7 billion, buoyed by strong compliance. The Committee noted that, total expenditures were below budget by $1.383 billion.
This outturn of tax revenues and expenditures contributed to a Primary Balance Surplus of $15.8 billion which exceeded the GOJ target of $14.2 billion. Non-Borrowed Reserves at US$2.484 billion also exceeded the SBA target of $2.073 billion at end June 2018.
“It is likely that the IMF SBA programme fiscal targets will be met for end June 2018,” EPOC said.
—Karena Bennett